Rental Property Renovation Depreciation

[bk22152]

In 2021 I did a major renovation to my rental property (complete remodel of kitchen and bathrooms, appliances, flooring).  At the time I selected "Appliances, Carpet and Furnishings" as the most logical selection under Rental Real Estate Property from the list of asset types provided.  I now see that it has set up my depreciation method as 200DB/MQ (which is 5 year double declining balance).  Is this acceptable or do I need to amend my 2021 and 2022 returns?  I see now through recent Q&A responses that I should have selected "Residential Rental Real Estate" (though this still looks more like adding a new rental property, than it does capital improvements on an existing property).

[Critter-3 · Accepted solution]

That is the correct place for the appliances which can be entered individually and depreciated over 5 years.   The rest of the improvement is depreciated like the rest of the property over 27.5 years... follow the residential property path to enter  that lump sum figure.

[Mike9241]

See this link for the guidance the iRS provided on repairs vs improvements. Those components that increase the value of the property must be capitalized. the permanent components like new floors, windows, tubs showers sinks would be 27.5 years. appliance and carpeting are 5 years.   Obviously some old components were replaced if these were separate assets any undeprecited balance can be written off.   

https://www.dbbllc.com/newsletters/focus-our-tax-e-newsletter/irs-clarifies-capital-improvement-vs-r... 

[TC78]

We did renovations to a condo before putting it into service in February 2024.  When I go to enter the value (after specifying "Appliances, carpet, furniture") it asks for a date of purchase.  There were about 40 trips to the hardware store over several months.  Do I need to enter every $8 purchase, or can we just list the asset as "Renovation" and use the date we put it in service?  The total value is only about $3000.

[PaulaM]

Was the property ever in service in 2023? If not, than the renovations made would be added to the property's basis and depreciated going forth in 2/2024. There is nothing to list for 2023.

[TC78]

Whoops!  Mental lapse, there.  The property was put into service in February of 2023, not 2024.  The renovations took place from mid 2022 to early 2023.

[PaulaM]

If all of the repairs/renovations took place prior to the property being placed in service in February of 2024, then those costs are added to the property's basis as improvements and depreciated. You'll see the page 'Any property improvements made?' in the property profile section. 

Improvements/repairs made when a property has already been placed in service but suspended while work is done, can be expensed/depreciated according to category. 

 

[TC78]

Yes, but my question is about entering the expenses for depreciation.  If the renovation took several months, can I lump all the 40 or so receipts together and just say the purchase date was the day the project was finished?  We did a variety of things, from new flooring and subfloor to replacing switchplate covers, and the receipts range from over $600 down to less than $3.

[RobertB4444]

It depends.  If the renovations were repairs to bring the value of the property back up to where it was then you can just deduct the lump amount and call it repairs.  If the renovations were improvements to increase the value of the property then the amount should be depreciated along with the original value of the property.

If this amount includes both of those things then you should divide it.

@TC78 

[Raeka]

I started restoring one of our old apts. when tenant moved out in June 2023. Its still not finished. I expect to finish this year. There will be more expenses but I paid the largest part already which was over $25K. That all happened in 2024. Do I now add the apt. restoration to the depreciation tables? It asks when it was put in service and I don't yet have a completion date or date a new tenant will be able to move in.  OR

Should I add this job as an asset list where I already have another similar situation called "Construction in progress" which I named hall project (still not done yet) and then move them each to depreciation schedule once the work is done and completed?

How do I handle that for 2024? Thanks

[DianeW777]

It depends. If your property is available for rent even while renovations are taking place then you add it  to the depreciation tables as a new asset if it is considered as structural components (see definition below). This would be added as an asset called 'Improvements-2024' in your rental property. As you noted, if you are not completely finished with renovations then you would not add any improvements until completed and the property is open and available for rent. Instead you would add that improvement when it is completed in 2025.

IRS definition of Structural components (for your review):

Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors, and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or heating system including motors, compressors, pipes, and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and lighting fixtures, and other parts that form the structure.

• Vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant. 
  • IRS Publication 527, page 6
    • Watch the questions in TurboTax to make sure a loss is not allowed if this fits your situation.
    • Example: Did you rent this property at fair rental value all of 2024? 

@Raeka 

[Thejezfamily]

I made an improvement to the façade of the rental building (external renovation) three years after purchasing the property.  Are you saying I should make a new depreciation asset using the residential real estate tab or should I add this improvement to the original price that I depreciated for the house when I originally bought it? Your statement “lump sum” makes me believe the latter. 

[AnnetteB6]

You would make a new depreciation asset to depreciate the cost of the external renovation.  It will be depreciated over the same number of years as the building itself, but it will be a separate asset since it was completed and placed into service after the original property.  

@Thejezfamily